When you hear the words "Cost Variance," "Schedule Variance," and "Performance Variance," do you immediately jump to the conclusion that the variance is negative and the project is somehow not where it is supposed to be? If you did, don't worry, you're not alone. All too often the word "Variance" is an unwelcome sound when delivering project status, so much so, that it fuels many Project Managers to sanitize or oversell their project's status. This is where projects tend to miss the built-in warning signs. You see, variance does not want to be taken for what's on the surface (typically represented by a numerical value or stoplight chart); it wants us to look under the hood to diagnose the issue and make a decision about what to do.
Since the car analogy seems to be taking shape, let's roll with it to better understand variance. Imagine you are at a car dealership, preparing to purchase a brand new car... The car has a Manufacturer's Suggested Retail Price (MSRP) of $19,995.00.
Here we have our first variance of negative $2,000.00 or 10%. The variance on the surface makes you feel good, but let's continue.
The salesman goes off and prepares the paperwork and when he returns the final documents say you owe $19,920.00. This is what is commonly referred to as the Out the Door Price or On the Road Price. What happened,didn'tyou just settle on $17,995.00? Where did the positive variance of$1,925.00 or 10.6% come from? And wait, how come the initial variance reduced the price by 10% but now it increased the price by 10.6%? Without understanding the basis of the numbers and what story they are telling, you probably feel a bit hustled at the moment. Let's pull over for a minute and put this in the context of managing projects: There are many factors that contribute to the "Real Price" the dealer can set for a vehicle. (1) The dealer's invoice, (2) hold-backs and factory to dealer incentives, (3) the dealer's operating cost, (4) and targeted profit all play major roles in the variables that make up the Purchase Price offered to customers. Similarly there are many factors that go into estimating the cost that will be incurred to complete the project; to include: type of labor, materials and services required to deliver on the project scope and quality, the timeline for completion, and targeted profit. Even after an agreeable purchase price is established, there are sometimes less obvious costs that are not addressed or accounted for in negotiations. In the example above, this included taxes and fees for freight, tags, and licensing that added up to almost the same amount that was negotiated down. Now consider if the cost factors had been estimated as part of the advertised price, would the negotiation seem more satisfying if it had gone from ~$22,000 (Advertised Price) to $19,920.00 (Out the Door Price) instead of MSRP ($19,995.00) to Negotiated Purchase Price ($17,995.00) to Out the Door Price ($19,920.00)? The variances behind the numbers remain unchanged, but the delivery of the numbers has been presented in a more gratifying manner to the buyer. The basis for a project's estimated cost is often times represented to suite a specific stakeholder or group of stakeholders. This representation may:
Ok, now that you are feeling better about the "Price", let's get back on route... Depending on how you relate to the "Price" of the car, be it MSRP, the Purchase Price, or the Out the Door Price - the Wholesale Price at the time of purchase is a constant The moment you take possession of the vehicle it depreciates from the Purchase Price to the Wholesale Price. So, the "Price" you relate to will determine how much depreciation you realize: $2,999.25 (MSRP - Wholesale), $999.25 (Purchase Price - Wholesale) or $2,924.25 (Out the Door Price - Wholesale).